As China ages, will its economy shrink?
Graeme Maxton believes complex changes in people’s spending patterns, unpredictable in the aggregate, will have huge implications economically, politically and socially
What happens to an economy when the population gets older? Does it shrink, because old people do not spend as much, or expand because the medical and elderly-care sectors grow?
These are vital questions if you have long-term interests in Hong Kong or the mainland as both are among the fastest ageing populations in the world. The number of people over the age of 65 in mainland China and Hong Kong will more than treble in the next 35 years to almost 330 million. At the same time, because of the one-child policy, the total population will decline by around 200 million.
This means that the number of people in greater China will fall by roughly 15 per cent while the number under the age of 65 will decline by more than a third – from around 1.25 billion today to just over 800 million in 2050. Those are very big changes and they will have a very big economic impact.
But how? Few people understand the implications of an ageing population properly, simply because humanity has almost no experience of the phenomenon, certainly outside Japan. As a population ages, large numbers of people who once worked become economically inactive. Instead of paying for their own costs from their earnings as they once did, they depend on their savings, as well as on money from their families or the state.
Their spending changes, too. The retired do not need to travel as they once did, so they buy fewer train tickets and less fuel. They tend to eat less. In the rich world, the elderly spend 25 per cent less on the things they typically consumed before, but more on health care and their families. By the time people reach the age of 85, their conventional consumption has fallen by half.
But, as individuals, the elderly also cost more. Spending on home security rises, as does their use of hospitals and health care. Their dependence on other people increases, too. Family members or paid home-carers take responsibility for previously unmet economic needs.
Vitally, this is often paid for by someone else, not the person who creates the demand. It is their children or the state who pay. Without some other change, this means that the spending of these children and the state on other goods has to fall. Put simply, as parents get old, children have less to spend on themselves and so their consumption falls, too.
The crucial point is that the consumption patterns of an ageing society are completely different from those of a younger society. The profile of consumers also changes as a society gets older, with far fewer men – progressively – than women.
These changes will have much more impact in mainland China and Hong Kong than they currently have in Japan. Many Chinese in their forties and fifties are much less prepared for their retirement than their counterparts in Japan were, in that they have not saved as much as they need to, while many of those who have will receive an income that is far lower than they expect because of today’s ultra-low interest rates. Many have also put their savings into property, creating a bubble. But, thanks to the shrinking population, this will burst too, and demand for apartments will fall.
This means that many elderly people’s dependence on filial piety is going to be sorely tested in the coming years and many of China and Hong Kong’s future elderly will be forced to spend less than they do now (because they will have less to spend) and live on whatever they can extract from the state and their families. If total demand starts declining, if the state is not willing to give the elderly the purchasing power needed to maintain full employment, or if the next generation is not willing to spend on their elderly parents what they have saved by having fewer children, the economy will shrink.
Even if this can be avoided, greater China’s ageing population will result in a radical economic restructuring and create increased uncertainty. No one can say exactly what all this will mean, politically or socially. All we can say is that the impact is very uncertain, and that the Chinese economy will need to change as much in the next 30 years as it has in the past 30.
Graeme Maxton’s latest book, Reinventing Prosperity, is published in October